Sunrun IPO: Promising Green Tech Company At A Reasonable Price

Solar power provider Sunrun is expected to go public this month and become the third significant provider traded together with SolarCity and Vivint.

The company presents substantial revenue diversification between financing activities and product sales and shows a rapidly growing top line revenue.

With an attractive valuation, Sunrun may be an excellent alternative to a SolarCity position.

Residential solar electricity provider Sunrun (RUN) filed an S1 document with the SEC, planning to go public sometime during July 2015. The San Francisco-based, clean-tech company leases solar-power systems to homeowners and enables them to use solar energy to power their homes and, as a result, to reduce their monthly electricity payments to local utility companies. Sunrun competes in an emerging market that includes Elon Musk’s SolarCity (NASDAQ:SCTY) and smaller player Vivint Solar (NYSE:VSLR). Sunrun is the second largest provider in the residential solar electricity market with almost 80,000 customers while SolarCity is the market leader with 218,000 customers and Vivint with only 42,146.

Sunrun was founded in 2007 and has focused mainly on the financing side of the residential solar electricity market, and the company hired local contractors to install and maintain the solar panels. In 2014, Sunrun acquired the residential installation and racking units of Mainstream Energy Corp. for an undisclosed sum to expand its portfolio and offer a full residential solar electricity package.

Sunrun Business Model

Sunrun generates revenue from multiple revenue streams: operating leases, incentives, solar energy systems, and product sales. The first revenue stream is more financially focused and includes Sunrun’s original business operation that is comprised of revenue from customer agreements, solar energy systems rebate incentives, sales of solar energy systems to third parties, and lease arrangements. This revenue stream accounted for 45% of the company’s revenues in Q1’15, and it increased more than 50% year-over-year. The second revenue stream, solar energy systems and product sales, includes operations acquired from MEC as mentioned above that generate revenue from selling solar power systems and peripheral equipment to homeowners, installing the equipment, and selling solar-related equipment to resellers. This revenue stream generated $27M in Q1’15 and accounted for 55% of the company’s revenues in the quarter.

Sunrun offers to individual homeowners a number of different plans and services that vary by upfront payment, financing method, annual increase rate, and service coverage. According to the company, homeowners can save up to 20% of their electricity bill by joining Sunrun from cheaper electricity prices and guaranteed rate hikes that are expected to be smaller than the price hikes of the local utility company, as shown in chart 1 below.

Sunrun has a negative bottom line and, in 2014, the company had a net loss of $162M ($191M TTM); however, it has grown rapidly at a 50% YoY rate in the operating leases stream as mentioned above. When the cmpany acquired MEC operations, it more than doubled Sunrun’s revenues to around $198M in 2014 ($217M TTM).

Sunrun Valuation and Funding Rounds

Sunrun raised more than $600M in 5 equity funding series and 3 series of debt financing. The company’s last funding round (Sereis E) raised $150M at a $1.3B valuation, slightly higher than Vivint Solar's market cap of $1.1B. As shown in the chart below, Sunrun’s preferred stock price increased exponentially from $1 in the series A funding to $13.83 in the series E funding round six years later.

Early shareholders include leading venture capital firms like Accel Partners, Sequoia Capital, Madrone Capital Partners, Canyon Partners, and Foundation Capital. Some of the shares that will be offered in Sunrun’s IPO will be sold by its current shareholders that, based on the IPO range described below, can yield 161% on a series E investment and an incredible 291% for a series D investment.

Sunrun IPO Price Estimation

Sunrun’s latest funding round set its valuation at $1.3B, which reflects a low P/S ratio of 6, based on $217M TTM revenue. Sunrun’s competitors, SolarCity and Vivint, have significantly higher P/S ratios than Sunrun, which allows the company to extend its IPO price range to reflect a P/S ratio that is on-par with the competition. However, I believe that to present an attractive investment opportunity, Sunrun should stretch its IPO to be slightly lower than SolarCity and significantly lower than Vivint. That way, Sunrun will appear more attractive than its peers and still withhold a growth potential. A reasonable range for Sunrun IPO price is between $32 and $39, which reflects a P/S ratio in the range of 17 and 14. The midpoint of this estimated range sets the company’s valuation at $3.3B—just in the middle between SolarCity’s $5B and Vivint’s $1B market cap, respectively.

Conclusion

Sunrun is expected to go public in July and become the third significant residential solar electricity provider to IPO after SolarCity and Vivint. Sunrun offers a broad customer base and substantial financing revenues to back up the solar system sales business. Even though the company presented a negative bottom line, it grows rapidly, and with the recently acquired division from MEC, this company has a wider offering and a stronger revenue model that is based not only on financing activities but also on selling solar systems to homeowners. After stretching its P/S ratio up to SolarCity’s levels, the company still reflects an attractive opportunity. With a share price of below $39, Sunrun can be a solid clean-tech addition as a niche and growing technology company. Investors interested in the potential of clean-tech and solar energy and looking for an alternative investment to SolarCity and Vivint will want to join the Sunrun IPO.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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Tesla's SolarCity deal has definitely added risk to the equation due to debt that has been added to the balance sheet. Musk's claims about low Model 3 prices, addressing the expanding debt and the new cheaper solar roof are over-hyped. Don't expect the $7,500 grant currently available in the US to continue.

Tesla shares have been sliding in the aftermath of Trump becoming the US president-elect. Investors are worried about Trump's stance regarding the need for government incentives for the clean energy sector. GM and Toyota recently announced that they will soon launch mass-market Electric Vehicles (EV).

Shares of SolarCity and Tesla gained yesterday after the shareholders approved the merger of the two companies. With the merger, Tesla has moved one step closer to becoming a clean energy company. The deal will open up several opportunities for the merged entity in the long run, but the short run challenges remain strong.

Tesla yesterday released a hardware update to its autopilot function which is likely to improve safety. Tesla is likely to report a strong quarter on the back of strong delivery numbers. SolarCity deal will continue to be a drag on Tesla stock.

Tesla needs a huge amount of money to run its operation and investment. The acquisition of SolarCity will make the liquidity position even worse. Tesla's Altman Z score shows a high risk of bankruptcy. The merger will increase the probability even more. Tesla stock remains very risky bet.

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Comments on this article and SCTY stock

Thanks for reading. Sunrun acquired residential rooftop solar installer business from Mainstream Energy Corp (MEC). In the article I mentioned that Sunrun acquired unit/division/operations and that is correct. Sunrun refers to the acquisition this way in the S-1 (around 100 times by the way) so I used the same phrasing. This MEC division is also known as REC, but it's the same thing as an MEC division.
Lior

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